Author: Alessandro Bacci
November 30, 2017
LONDON — Iran has the world’s fourth largest proven crude oil reserves at 158 billion barrels (after Venezuela, Saudi Arabia, and Canada) and the world’s first proven natural gas reserves at 1,183 trillion cubic feet.
Crude oil reserves are spread across more than a 140 hydrocarbon fields onshore (two thirds) and offshore (one third) — many of them containing associated gas as well. In Iran, the average cash cost to produce a barrel of oil or gas equivalent in 2016 was less than 10 dollars. Iran is currently producing 3.8 million barrels of crude oil per day (most production comes from the four largest oil fields), and it exports 2.4 million barrels to 2.6 million barrels of crude oil per day. Of Iran’s exported crude oil, 55 percent goes to Asia (excluding Turkey) and 25 percent goes to Europe.
With reference to natural gas, South Pars is the largest natural gas field in the world, and it makes up about 50 percent of Iran’s natural gas reserves. This field is offshore in the middle of the Persian Gulf waters, and it’s shared with Qatar. In Iran, natural gas production has consistently risen (about 10 percent a year) since the 1980s with the specific goal of serving almost exclusively the domestic market. Iran is currently producing over 800 million cubic meters of natural gas per day, of which about two thirds come from South Pars.
Indeed, these numbers are impressive, and they show with no doubt that Iran is one of the world’s premier locations for oil and gas production — the first large petroleum find in the Middle East occurred in 1908 in Persia, i.e., in Iran. However, since 1979, the year of the Iranian Revolution, the political relationships between Western countries and Iran have been difficult especially after the imposition of economic sanctions by the United States and the European Union, respectively at the end of 2011 and during the summer of 2012. These sanctions had both a direct and indirect impact on the Iranian hydrocarbons industry. In fact, as a result of the economic sanctions, Iranian crude oil production dropped from 3.7 million barrels per day in 2011 to 2.7 million barrels per day in 2013.
An important result was achieved in January 2016 when began the implementation of the Joint Comprehensive Plan of Action (J.C.P.O.A.), i.e., the international agreement on Iran’s nuclear program between Iran, the P5+1, and the E.U. This deal removed part of the nuclear-related sanctions that had previously been adopted by the European Union, the United Nations, and the United States. The European Union and the United Nations terminated all their sanctions while the United States lifted only its nuclear non-proliferation secondary sanctions, which targeted non-U.S. individuals outside the U.S. jurisdiction. In other words, U.S. citizens and companies are still not entitled to do business in relation to the Iranian energy sector.
Since the signature of the deal, Iran has been committed to developing its economy with the specific goal of improving its oil and gas sector, which, after years of limited and low-technology investments, needs funding for about 200 billion dollars. In 2016, the first year with no sanctions since 2011, crude oil production was about 3.5 million barrels per day, which meant an increase of 350,000 barrels per day on the pre-sanctions levels. According to the World Bank, the Iranian economy registered in 2016 an oil-based bounce back, showing an annual growth rate of 13.4 percent in comparison with a 1.3 percent contraction in 2015.
Many international energy companies have expressed their interest in Iran’s oil and gas sector. The National Iranian Oil Company (NIOC) has produced a list comprising 34 international oil companies that prequalified for participating in Iran’s oil and gas projects under the terms of the Iran Petroleum Contract (I.P.C.), the new Iranian petroleum contract. Among the selected companies, there are some from Asia, Europe, Latin America, and Russia. Many of these companies were already involved in Iran before the introduction of the sanctions in 2011 and 2012. With 6 companies within the list of the selected 34, Russia is the country with most companies interested in Iran’s oil and gas sector.
There are of course some important absentees, such as, the U.S. majors, which have been banned from doing investments in Iran as well as from purchasing Iranian crude oil for almost four decades, and British Petroleum. Apart from the U.S. companies, those international oil companies that have decided not to participate in Iran’s oil and gas sector have a different perception of the geopolitical risk linked to the possible reintroduction of U.S. sanctions against Iran. In fact, the Trump administration is menacing to retire the United States from the J.C.P.O.A. unless this deal is amended with the introduction of clauses permanently blocking Iran from building nuclear weapons and intercontinental missiles. Congress has until mid-December 2017 to decide on the issue.
Instead, last July, France’s Total became the first major to sign a post-sanctions development deal (an I.P.C.) with Iran. This agreement concerns Phase 11 of South Pars. This project will have a production capacity of about 2 billion cubic feet per day, or 400,000 barrels of oil equivalent per day (condensate included). The interest of Russian and Chinese companies in Iranian energy operations might permit Iran to continue develop its hydrocarbons sector and to have export markets also in case the United Stated decided to re-enact its sanctions.
The most important tool in order to attract international oil companies to invest in Iran will be the new Iranian Petroleum Contract (I.P.C.), which according to the I.P.C. By-law of August 2016 will be applied to activities relating to
- Exploration, development, and production
- Development concerning existing fields and already discovered areas
- Improvement of recovery rates for existing fields
Since the 1990s, Iran has been using a risk-service buyback contract for both exploration and development; under the buyback terms, the international oil companies pay for all the investment costs and then receive remuneration according to project advances and a specific rate of return via allocation of the production. International oil companies have always been quite unsatisfied with the terms of the buyback model because of its rigidity and poor economic return (a five- to eight-year remuneration period only).
The main characteristics of the I.P.C.s are
- Establishment of a joint venture between the international oil companies and a local Iranian exploration and production company
- Duration for 20 years starting with the development operations with a possible extension of further five years
- All risks and costs on the international oil companies alone in case that a commercially viable field/reservoir is not discovered
- Full cost recovery thanks to a longer recovery period in case of a commercially viable project
- Remuneration, a fee per barrel, linked to the oil price, to the specific complexity of the project, and to a sliding scale
- Remuneration to be paid out of a maximum of 50 percent of crude oil production and 75 percent of natural gas production
- Payment of petroleum costs and remuneration fee through either production or cash payment
- Incentives offered as for higher risk projects, and enhanced oil recovery (E.O.R.) with reference to brownfields projects
- Local content requirement set at 51 percent of the value of the contract
- Dispute between contractor and NIOC resolved by way of escalation with arbitration as the last available step
It’s still unclear whether the international oil companies will be allowed to book reserves without breaking the Constitution, which states that foreign or private ownership of natural resources is illegal. It’s evident that the possibility of booking reserves might increase the attractiveness of investing in Iran to the international oil companies.
The geopolitical tensions running throughout the Middle East coupled with the U.S. possible decision to reintroduce some sanctions against Iran might indeed create some problems to Iran at both the political and economic level. However, Iran’s oil and gas industry has some interesting advantages, such as, the world’s fourth largest proven crude oil reserves and first proven natural gas reserves, very low production costs, a geographical position permitting Iran to well serve both the Asian and the European markets, an improved petroleum contract (although still to be comprehensively assessed) in comparison to the buyback contract, a large internal market for both refined products and petrochemicals, and vast undeveloped oil and gas reserves.
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